Derivatives including hedging. Academic Resource Center Derivatives including hedging Page 2 Typical...

Derivatives including hedging

Academic Resource Center


Typical coverage of US GAAP

► Defining financial risks and derivatives

► Definitions and scope of derivative accounting

► Derivative accounting (for instruments not meeting the requirements for hedge accounting)

► Hedge accounting

► Disclosures



Executive summary

► The definitions of derivatives are generally similar under IFRS and US GAAP, however, two differences do exist:

► Under US GAAP, a derivative must have a notional amount or payment provision. There is no such requirement under IFRS.

► Under US GAAP, a derivative has a net settlement provision. There is no such requirement under IFRS. IFRS deals with this notion when addressing how to account for normal purchases and sales. Effectively, the accounting is very similar.

► Normal sales and purchases:

► These are defined under both IFRS (referred to as own use contracts) and US GAAP as a contract or commitment to buy/sell non-financial items for an entity’s normal operations (own use) with the intention of making/taking delivery of the item.

► Under IFRS, these contracts are scoped out.

► Under US GAAP, these contracts may be scoped out (elective) if certain criteria are met.



Executive summary

► Under both IFRS and US GAAP, derivatives that do not qualify for hedge accounting are recognized at fair value with gains/losses recognized in income.

► Although US GAAP and IFRS give the same basic definition of an embedded derivative, the two standards apply the “closely related” principle differently in some circumstances.

► IFRS provides no definitive guidance on what is meant by “closely related” while US GAAP provides specific guidance on how to evaluate the “clearly and closely related” concept. IFRS provides no definitive guidance on what is meant by “closely related.”

► Hybrid instruments are assessed for embedded derivatives only upon initial recognition under IFRS, while US GAAP requires initial and continual reassessment.



Executive summary

► Derivatives, such as options or forward contracts of a company’s own shares, are accounted for differently.

► Under IFRS, these instruments may be classified as equity when they can be settled only by exchanging a fixed amount of own shares for a fixed amount of cash or another financial asset (fixed-for-fixed). Also, if a derivative financial instrument has settlement options that give one party the choice over how it is settled, it is equity only if all possible settlement alternatives would result in it being an equity instrument. Otherwise, these instruments are accounted for as derivatives or liabilities.

► Under US GAAP, these instruments generally would not be accounted for as derivatives except in limited situations.

► Hedge accounting is generally very similar under IFRS and US GAAP. One key difference is that the shortcut method of assessing hedge effectiveness is allowed under US GAAP but not under IFRS. The shortcut method can be applied only to interest rate swaps related to interest rate risk that meet certain criteria.



Primary pronouncements

US GAAP

► ASC 825, Financial Instruments

► ASC 815, Derivatives and Hedging

► ASC 480, Distinguishing Liabilities from Equity

► ASC 820, Fair Value Measurements and Disclosures

IFRS

► IFRS 7, Financial Instruments: Disclosures

► IAS 32, Financial Instruments: Presentation

► IAS 39, Financial Instruments: Recognition and Measurement*

► IFRS 9, Financial Instruments*

*IFRS 9 is expected to ultimately replace IAS 39. However, the project to update IAS 39 has been divided into three main phases. Therefore, IFRS 9, issued in November 2009, provides guidance only on the classification and measurement for financial assets. As the IASB completes each phase, as well as its separate project on the derecognition of financial instruments, it will delete the relevant portions of IAS 39 and create chapters in IFRS 9 that replace the requirements in IAS 39. The Board aims to replace IAS 39 in its entirety by the end of 2010.



Progress on convergence

► Financial instruments with characteristics of equity (formerly liabilities and equity) – a joint project between the FASB and the IASB.

► After receiving the comments on the FASB Preliminary Views Document, the FASB redeliberated on various matters during 2009 and reached a series of tentative conclusions. However, due to the volume and nature of comments received on the draft ED before it was made public (e.g., inconsistent classification results, inadequate consideration of specific guidance that exists today under US GAAP), the FASB discussed a potential delay in the expected issuance of an ED at its May 11, 2010 meeting (originally expected by June 30, 2010).

► The revised expected issuance date of the ED is unknown.

► The scope of the project includes all financial instruments with some exceptions.




► Fair value measurements:

► In September 2006, the FASB issued its guidance on fair value measurements (ASC 820).

► In May 2009, the IASB published an ED on fair value measurements which was largely consistent with the principles in ASC 820. It does not extend the use of fair value, but rather, like ASC 820, would establish a single source of guidance for all fair value measurements under existing IFRS.

► While the IASB’s ED was largely consistent with the guidance of ASC 820, certain differences still existed. Therefore, in October 2009, the Boards committed to work on developing converged fair value measurement guidance and have completed their joint deliberations in April 2010. The FASB will publish an ED of amendments to ASC 820 in the second quarter of 2010 while the IASB will re-expose certain aspects of the fair value measurements guidance.




► Simplification of accounting for financial instruments:

► The Boards are currently working on a joint project on accounting for financial instruments, which will address classification and measurement, impairment and hedge accounting.

► The IASB issued IFRS 9, Financial Instruments, in November 2009, which provides guidance on classification and measurement of financial assets. This was followed by the ED on proposed changes to the fair value option for financial liabilities issued in May 2010 with the comment period ending July 16, 2010. The IASB also issued an ED on amortized cost and impairment in November 2009 with the comment period ending June 30, 2010. The IASB expects to publish an ED on hedge accounting in time to allow for finalization by the end of 2010.

► The FASB issued a comprehensive overall ED, Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging Activities, on May 26, 2010. Comments are due by September 30, 2010.

► The Boards are committed to achieving a converged solution to reduce financial instruments complexity by the end of 2010.



Defining financial risks and derivatives

Similar

Financial risks include credit risk, market risk (which includes currency risk, interest-rate risk and other price risks) and liquidity risk.

IFRS 7, Appendix A includes the following definitions:► Credit risk: the risk that one party to a financial instrument will cause a financial loss for the other party by failing to

discharge an obligation.

► Currency risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

► Interest-rate risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

► Liquidity risk: the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities.

► Market risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: currency risk, interest-rate risk and other price risk.

►Other price risk: the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest-rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market.

IFRSUS GAAP



Defining financial risks and derivatives

Derivatives are legally binding financial instruments or other contracts which derive their value from the value and characteristics of one or more underlying.

►They include swaps, options (including caps, floors and collars), swaptions, futures and forward contracts.

►An underlying may be any variable whose changes are observable or otherwise objectively verifiable.

A derivative is financial or non-financial based on its underlying:

►Financial derivatives (such as forward contracts to buy euros or interest-rate swaps) have an underlying with financial attributes (e.g., currency, interest rate, price of a financial asset such as a common share).

►Non-financial derivatives, more commonly known as commodities (including wheat futures, forward-gold sales, etc.), have an underlying with non-financial attributes (price of wheat, gold or other commodity).

IFRSUS GAAP

Similar



Definitions and scope of derivative accounting

The value of the derivative changes in response to the change in value of the underlying.

Although IAS 39.9 does not provide the exact same definition of a derivative as ASC 815-10-15-83, the two definitions are generally similar.

IFRSUS GAAP

There is no minimal net investment required.

Similar

Similar

The contract is settled at a future date. Similar




A normal sale and purchase contract is defined as a commitment to buy/sell non-financial items for an entity’s normal operations with the intention of making/taking delivery of the item.

Similar, except known as own use contracts.

IFRSUS GAAP




IFRS

► Makes no reference to these terms.

► An instrument might be deemed a derivative under IFRS but not under US GAAP.

US GAAP

► Makes reference to a notional amount or payment provision. ► A notional amount is a nominal or face amount that is used to

calculate payments on the instrument. For instance, a forward contract may require the holder to buy 100 euros for $1.10 US. The 100 euros are the notional amount.

► A contract may stipulate that a payment of $100 will be made if the NYSE dips below a certain benchmark. The $100 is the payment provision.

► The position is that if there is no notional amount or payment provision, the contract may not be measurable and, thus, should not be governed by the standard.



Example 1

The Ol’ Irish Company (Irish) normally sells goods in Europe and, therefore, has a stream of income that is denominated in euros. Irish enters into an agreement with a bank to convert euros

to US dollars.

Notional amount example

► Is this contract considered a derivative under US GAAP or IFRS?



Example 1 solution:

Because this contract does not stipulate how many euros are going to be converted, it has no notional amount and, therefore, is difficult to measure.

US GAAP:

This contract would automatically be precluded from being a derivative because it has no notional amount.

IFRS:

If Irish can measure the value of the contract, then it might be accounted for as a derivative.

Notional amount example




IFRS

► Does not include a net settlement provision requirement in the general definition of a derivative.

US GAAP

► Includes a net settlement provision requirement in the general definition of a derivative. The provision requirement can be met in one of the following ways:

► Net settlement directly through the contract terms.

► The existence of a market mechanism that facilitates net settlement outside the contract.

► The delivery of an asset that is readily convertible into cash.

► Therefore, certain types of transactions dealing with non-financial assets are generally scoped out of derivative accounting. For instance, contracts such as purchase commitments (to buy commodities) generally do not include net settlement provisions and, therefore, are not accounted for as derivatives.




IFRS

► Own use contracts are automatically exempt from derivative treatment.

US GAAP

► A normal sale and purchase contract is a commitment to buy/sell non-financial items for an entity’s normal operations with the intention to settle gross by making/taking delivery of the item.

► Entities can make an election not to account for normal purchases and sales contracts as derivatives even though they meet the definition of a derivative.

► The election is made on a contract-by-contract basis and must be documented at the inception of the contract. If the election is not made, derivative accounting applies.

► This requirement to elect and document effectively makes the accounting for these normal purchases and sales an accounting policy choice.



Example 2:

Part I:

The Corn Company (CC) produces baked goods and uses corn in its baking process. CC enters into a forward contract to buy 125 bushels of corn in 30 days for $500. The contract has a net settlement provision. Assume that the corn is worth $550 at the end of 30 days.

Net settlement and normal purchases and sales example

► Explain how the contract might be settled in 30 days.



Example 2:

Part I solution:

The existence of the provision means that the contract can be settled in one of two ways:


► CC can take delivery of the corn in 30 days and pay $500 (referred to as gross settlement).

► At the end of the 30 days, both parties can figure out what the corn is actually worth. In this example, the corn is worth $550 but CC only has agreed to pay $500. If the contract is net settled, the counterparty will pay CC $50 cash and not deliver the corn.



Example 2 (continued):

Part II

In addition to using the information in part I, also assume that the corn is not easily convertible to cash and that CC has a history of taking delivery of the corn under these types of contracts (gross settlement). CC has decided against documenting the instrument as a normal purchase and sales (own use) contract.


► Explain whether this contract is considered to be a derivative under US GAAP and IFRS.

► Prepare the journal entries under US GAAP and IFRS.



Example 2:

Part II solution:

This contract meets the following derivative definition criteria for both US GAAP and IFRS: ►Its value will change based on the value of the corn.

►There is no investment up front when the contract is entered.

►The contract will be settled at a future date.

US GAAP: In addition to meeting the above criteria, this contract meets the additional derivative definition requirement of a net settlement provision. This contract can also be considered a normal purchase and sale contract as there is a commitment to buy a non-financial item (corn) to be used in CC’s normal business operations with the intention to take delivery of the corn. Given that CC did not document the contract as a normal purchase and sale at its inception, CC did not meet the exemption criteria and, as a result, must account for the contract as a derivative.

IFRS: This is an own use contract exempting treatment as a derivative.




Example 2, part II solution (continued):

Contract inception

US GAAP: No journal entry because most forward contracts are priced at $0 at inception.

IFRS: No journal entry since the contract is treated like a purchase commitment (executory contract).

Settlement date

US GAAP:

Financial asset – derivative $50

Gain on derivative $50

To recognize the change in value of the derivative.

Inventory $550

Financial asset – derivative $ 50

Cash 500

To reflect the settlement of the contract and delivery of the corn.

IFRS:

Inventory $500

Cash $500

To reflect the settlement of the contract and delivery of the corn.




Derivative accounting (for instruments not meeting the requirements for hedge accounting)

All derivatives are recognized on the balance sheet at fair value when the entity becomes party to the contract.

Derivative instruments are recognized at fair value on an ongoing basis.

Similar

Similar

IFRSUS GAAP

Related unrealized gains and losses are recognized in income.

Similar

Derivatives that are embedded in another instrument that are not considered closely related to that instrument must be separated and accounted for as derivatives (carried at fair value with gains/losses recognized in income).

Similar



Derivative accounting (for instruments not meeting the requirements for hedge accounting) – an entity’s own equity instruments

IFRS

► Classification of certain instruments with characteristics of both debt and equity focuses on the contractual obligation to deliver cash, assets or an entity’s own shares. Economic compulsion does not constitute a contractual obligation.

► Contracts that are indexed to, and potentially settled in, a company’s own stock are classified as equity when settled by delivering a fixed number of shares for a fixed amount of cash.

US GAAP

► Certain instruments with characteristics of both debt and equity are specifically identified and must be classified as liabilities.

► Contracts that are indexed to, and potentially settled in, a company’s own stock may be classified as equity if they: (1) require physical settlement or net-share settlement; or (2) give the issuer a choice of net-cash settlement or settlement in its own shares.

► A contract that could be required to be settled in cash is not considered to be an equity instrument.



Summary of accounting for an entity’s own equity instruments:

US GAAP IFRS

Derivative contract on company’s

own shares Gross physical

settlement Net share settlement

Gross physical

settlement Net share settlement

Forward contract to buy Asset or liability Asset or liability

at fair value Asset or liability Derivative

Written call option Equity Equity Equity Derivative

Written put option Liability at fair value Liability at fair value Liability Derivative

Derivative accounting (for instruments not meeting the requirements for hedge accounting) – an entity’s own equity instruments



Example 3

The Canadian Cupcake Company (Cupcake) issues call options for a premium of $50 on December 1. The call options give the holder the right to buy 10 shares of Cupcake for $1,000 on December 31. The contract may be settled net (in cash or shares) at the option of Cupcake. On December 31, the shares are worth $1,300 and the options are exercised. Cupcake decides to settle gross and receives $1,000, delivering the 10 shares.

An entity’s own equity instruments example

► How would these be accounted for under US GAAP and IFRS? Prepare the journal entries for December 1 and December 31.



Example 3 solution:

US GAAP:

December 1

Cash $50

Equity – written call options $50

To record the issuance of options.

The options are recorded as equity since they are indexed to and potentially settled in Cupcake’s own stock. The options give the issuer a choice of net-cash settlement or settlement in its own shares. There is, therefore, no obligation.

December 31

Cash $1,000

Equity – written call options 50

Common stock $1,050

To record the option exercise.




Example 3 solution (continued):

IFRS:

December 1

Cash $50

Financial liabilities – derivative $50

To record the issuance of options.

The options are not considered to be equity since there is a choice of how to settle and all settlement alternatives do not result in the options being equity instruments. In addition, the contract does not result in the transfer of a fixed amount of shares for a fixed amount of cash under all settlement options. In this case, the net cash settlement option results in a potential liability even though it is at the option of the company. The options are, therefore, considered to be derivatives since they meet the definition criteria as follows:► The value of the options varies with respect to the underlying shares.► The initial investment is small compared to the value of the shares.► The option may be settled in the future.





December 31

Loss on derivatives $250

Financial liabilities – derivative $250

To revalue the derivative to fair value.

Cash $1,000

Financial liabilities – derivative 300

Common stock $1,300

To record the option exercise.




Derivative accounting (for instruments not meeting the requirements for hedge accounting)

IFRS

► The determination of whether an embedded derivative should be separated from the host instrument and accounted for as a separate instrument focuses on whether the economic characteristics and risks of the embedded derivative are closely related to the economic characteristics and risks of the host contract. Specific guidance is not provided to make this evaluation.

► Hybrid instruments are assessed for embedded derivatives only at inception of the contract.

US GAAP

► The determination of whether an embedded derivative should be separated from the host instrument and accounted for as a separate instrument focuses on whether the economic characteristics and risks of the embedded derivative are clearly and closely related to the economic characteristics and risks of the host contract. Specific guidance is provided to make this evaluation.

► Hybrid instruments are assessed for embedded derivatives at the inception of the contract and continually thereafter.



Example 4

The EDR Company issues debt at par ($100 million) that is callable at any time during its 10-year term. If the debt is called, the investor receives the greater of the par value of the debt or the market value of 100,000 shares of XYZ common stock (an unrelated company). The call option has a fair value of $10,000 at the time of issuance.


► How would these be accounted for under US GAAP and IFRS? Prepare the journal entries for December 1 and December 31.



Example 4 solution:

US GAAP:

The call option is not clearly and closely related to the debt host instrument because the payoff is indexed to an equity price of an unrelated company. This call option would be treated as a derivative and recorded at fair value at the date of issuance of the debt.

IFRS:

The accounting under IFRS would be similar to US GAAP in that the call option is not closely related to the economic characteristics and risks of the debt instrument and would be recorded at fair value at the date of issuance of the debt.

The journal entry to record the initial transaction is the same under US GAAP and IFRS.

Cash $100,000,000

Call option $ 10,000

Debt 99,990,000

To record the issuance of $100 million in debt with a 10-year call option.




Hedge accounting

Specifies three types of hedges and defines a fair-value hedge and a cash-flow hedge: ►Fair-value hedge: “A hedge of the exposure to changes in the fair value of a recognized asset or liability, or of an unrecognized firm commitment, that is attributable to a particular risk.”►Cash-flow hedge: “A hedge of the exposure to variability in the cash flows of a recognized asset or liability, or of a forecasted transaction, that is attributable to a particular risk.►Hedges of a net investment in a foreign operation.

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IFRSUS GAAP



Hedge accounting

IFRSUS GAAP

The following set criteria must be met in order for a transaction to qualify for hedge accounting:►Formal designation and documentation of the hedging relationship, including the entity’s risk management objectives/strategy.

►Expectation that the hedge will be highly effective in achieving offsetting gains and losses (gains and losses offset and results of the hedge are within the range of 80% to 125%).

►For cash flow hedges of future transactions, an expectation that the future transaction will be probable.

►A requirement that the effectiveness of the hedge be measurable.

►A requirement to test the effectiveness on an ongoing basis to ensure that it is highly effective.

►Discontinuation of hedge accounting if: 1) the hedger elects to terminate the hedge relationship (de-designation); 2) the hedged transaction is no longer highly probable; 3) the hedged item is derecognized; 4) the hedging instrument expires, is terminated, sold or exercised; or 5) the hedge is no longer highly effective.

Similar



Hedge accounting

Gains and losses from a fair-value hedge (to the extent the hedge is effective) are recognized in income. In addition, the gain or loss on the hedged item is recognized in income.

Similar

IFRSUS GAAP

Gains and losses from a cash-flow hedge (to the extent the hedge is effective) are initially recognized in OCI. Once the underlying transaction has occurred and has been recognized in income, the gain/loss that was originally reported in OCI is reclassified into income in the same period.

Even if a hedge is determined to be effective (thus allowing hedge accounting as long as all other criteria are met), any ineffectiveness must be recognized in income.

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Hedge accounting

IFRS

► Does not allow the shortcut method.

US GAAP► An option known as the shortcut method allows an entity to prove or

conclude no ineffectiveness specifically for interest-rate swaps related to interest-rate risk and only under specific conditions. ► This shortcut method is performed by comparing very specific elements of

interest-rate swaps and the debt instruments to which they are linked. If certain criteria are met, the entity can claim no ineffectiveness and does not have to perform what is referred to as long-haul effectiveness testing on an ongoing basis.

► The shortcut method is a specific rules-based exception to the general hedging guidance of ASC 815 and is applied with caution in the US. Importantly, the shortcut method does not require the fixed leg of a swap and the fixed rate on a debt instrument to be identical, an accommodation that masks some amount of hedge ineffectiveness



Example 5

The Outrageous Oil Company (Outrageous) has decided that in light of recent events, it must upgrade its oil drilling equipment and, therefore, needs a significant amount of money to invest in the latest technology. Accordingly, Outrageous has decided to issue $100 million of variable rate, 10-year bonds on January 1, 2010. The bonds will bear a floating rate of interest at 2% above the London Interbank Offering Rate (LIBOR), and the interest will adjust quarterly on March 1, July 1, October 1 and January 1 of each year. The debt has no prepayment requirements or option feature.

Outrageous has also decided to hedge the variability of the interest rate payments and wants to lock in a fixed rate of interest for the term of the debt. Therefore, concurrently with the issuance of

Hedge accounting example

the debt, Outrageous has entered into an interest-rate swap with a major New York, AAA-rated bank whereby Outrageous will pay a fixed rate of interest of 5% and receive a floating rate on interest of LIBOR plus 2%, for a notional amount of $100 million for a 10-year period beginning January 1, 2010. Payments will be settled quarterly and rates adjusted at March 1, July 1, October 1 and January 1 of each year.



Example 5 (continued):Outrageous has formally designated and documented a hedging relationship and has included its risk management objectives in the documentation. Outrageous has the expectation that the interest-rate swap will be highly effective. Outrageous considered the likelihood of the swap counterparty’s compliance with the contractual terms of the hedging derivative and has determined that it is probable that the counterparty will be able to make payments to Outrageous as agreed.


► Does this interest-rate swap meet the criteria for hedge accounting under US GAAP and IFRS?

► Does the swap qualify for the shortcut method in assessing hedge ineffectiveness under US GAAP and IFRS?



Example 5 solution:

This interest-rate swap meets the key requirements for hedge accounting under both US GAAP and IFRS based on the following criteria:►Formal designation and documentation of the hedging relationship, including the entity’s risk management objectives/strategy.►Expectation that the hedge will be highly effective in achieving offsetting gains and losses (gains and losses offset and results of the hedge are within the range of 80% to 125%).►For cash flow hedges of future transactions, an expectation that the future transaction will be probable.►A requirement that the effectiveness of the hedge be measurable.




Example 5 solution (continued):US GAAP:Further, this specific cash-flow hedge should qualify for the shortcut method for effectiveness testing as the key requirements are matched as follows (ASC 815-20-25-102 through 25-104 and ASC 815-20-25-106 through 27-117):►The notional amount of the swap of $100 million matches the principal amount of debt of $100 million.►The fair value of the swap is zero at inception on January 1, 2010.►The formula for computing the net settlement of the interest rate swap is the same for each settlement by meeting the following conditions:

► The fixed rate is the same throughout the term (quarterly on the same dates between the interest rate swap and the underlying debt).

► The variable rate is based on the same index (LIBOR) and includes the same constant adjustment or no adjustment.►There is no prepayment requirement or option on the debt.►The index for the variable rate portion of the interest rate swap is the same as the benchmark interest rate on the debt (i.e., 2% above LIBOR).

As the criteria for using the shortcut method are met, Outrageous is not required to periodically evaluate hedge effectiveness of a hedging relationship and can assume no hedge ineffectiveness going forward. The accounting for such hedges is significantly simplified.





IFRS:

There is no shortcut method in IFRS. Therefore, IFRS requires reporting entities with similar hedge relationships using interest rate swaps to identify and document in the initial hedge documentation a method of periodic hedge effectiveness assessment and ineffectiveness measurement. Ongoing assessment is required with the ineffective portion of the hedge calculated and recognized in profit or loss each period.

Despite the difference in the requirement for quarterly effectiveness assessment between US GAAP and IFRS, the accounting for the interest rate swap would be the same for both US GAAP and IFRS.




Disclosures

Disclosures relating to derivatives and hedging are often included with the general financial instrument disclosures.

IFRSUS GAAP

Disclosure is required to help users understand:

►How and why an entity uses derivatives (including identifying risk exposures and which derivatives are used for risk management versus which are used for other purposes).

►How derivatives and related hedge items are accounted for.

►How the derivatives affect the financial position, performance and cash flows (including volume and fair value of derivative activities, related gains/losses).

►Qualitative and quantitative disclosures required to explain objectives, strategies, volume and positions.

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Disclosures

The quantitative disclosures that are required for all derivative instruments and hedged items designated and qualifying as fair value hedging relationships, including non-derivative instruments, include:

►The net gain or loss recognized in income during the reporting period representing the amount of the hedge’s ineffectiveness, the amount (if any) excluded from the assessment of hedge effectiveness and a description of where the net gain or loss is reported.

►The net gain or loss recognized in income when a hedged firm commitment no longer qualifies as a fair-value hedge.

►These disclosures are required for every interim reporting period.

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IFRSUS GAAP



Disclosures

The quantitative disclosures that are required for all derivative instruments designated and qualifying as cash flow hedging instruments include:

►A description of the transactions or other events that will result in the reclassification of gains or losses in income that are reported in accumulated OCI, and the estimated net amount of the deferred gains or losses that will be reclassified into income in the next 12 months.

►The maximum amount of time over which an entity is hedging its exposure for forecasted transactions.

►The amount of gains or losses reclassified into income as a result of the discontinuance of cash-flow hedges because it is probable that the original forecasted transaction will not occur.

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IFRSUS GAAP



Disclosures

Both standards require copious and detailed disclosures. In principle, the types of disclosures are similar; however, because the wording is different, there may be specific differences at a very detailed level.



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